Little upside in near term for Maruti Suzuki

The current stock price factors in all the positive triggers

After plummeting to a 52-week low in December 2011, shares of Maruti Suzuki have risen 51 per cent to Rs 1,370. Given that FY12 has been one of the most difficult years for the company, both in terms of profitability and volumes, the management believes FY13 will see a sharp recovery in volumes and realisations. However, the company’s operating performance in the fourth quarter has disappointed the Street.

Given that all of FY12 has been poor in terms of industrial activism and low profitability and Q4 was mixed, what is in store for the company in FY13? For starters, the steady fall in margins would be arrested, which has been worrying analysts the most. Recovery had begun in Q4. From plummeting to 5.3 per cent in Q3, margins had risen to 7.3 per cent in Q4. However, it’s too early to celebrate as in the corresponding quarter of the previous year, margins stood at 10 per cent — clearly, the company has some more catching up to do this year.

The reason margins are still under pressure is due to rising discounts on petrol cars. Discounts per vehicle are up from Rs 12,365 in Q3 to Rs 13,500 in Q4. Also, it had compensated Rs 200 crore to vendors for currency fluctuations. These are the two big reasons behind the inability to improve margins. In FY13, Maruti is unlikely to see any payouts for currency fluctuations as it has covered 50 per cent of its dollar and yen exposure.

On the volume front, the market is expecting it to grow ahead of the industry’s 8-10 per cent. Deepak Jain, auto analyst at Sharekhan, says, “Maruti is likely to grow volumes by 19 per cent. Since the diesel portfolio contributes to nearly 30 per cent of total sales, margins are expected to improve to 8.1 per cent in the first quarter.” This implies a monthly run-rate of 112,000 cars. Through the year, analysts expect margins to improve by 130 basis points to 8.6 per cent.

However, the current stock price factors in all these positives, leaving little room for negative news, believe experts. There are two issues that can negatively impact Maruti’s shares. The first is a major wage revision, as has been reportedly demanded by the unions. The second is a sharp and sustained depreciation of the rupee. Given that the stock is trading at a forward price/earnings multiple of 16 times, higher than its historical average of 14 times, analysts believe there are downside risks.